Bruce Cleveland - Part 2 - thoughts on current enterprise market

In Part 1 yesterday, Bruce Cleveland talked about the framework in his new book, Traversing the Traction Gap. Here we talk about partnering and white spaces in the market.

Most enterprise vendors now offer their own platforms. Could they use your framework to develop a vibrant network of startups on their platforms?

At Siebel, we used partners to dominate – I know the word is overused— the industry.  We grew from initial product release to $2 billion in revenue in 4.5 years. In 1999, Deloitte named Siebel the “fastest growing company in the US” with a staggering CAGR of more than 750,000%.  We only accomplished this because we (by “we” I mean Tom Siebel) put significant resources (personnel and capital) into building a technical platform and a robust ecosystem to support it. 

Tom knew he had to “remove the constraints on the growth of the business.” We needed systems integrators who were trained and certified on Siebel implementations. We needed to our applications tuned to run optimally on various hardware systems. And, we needed numerous third-party applications that could interface and interoperate with our application suite.

Consequently, Tom charged me with building the Siebel Alliance Program. Tom had created our first systems integration partnership with Andersen (now Accenture).  He also had created our first hardware relationship with Compaq and our first software partnership with Microsoft.

I simply took Tom’s initial ideas and those partnerships and developed a scalable partner program from them.  We began the Siebel Alliance Program with Accenture, Compaq and Microsoft and over the course of three years we accumulated a total of 750 partners. These partners generated about a $B of additional annual license revenue for Siebel and helped us ensure that those licenses were implemented successfully. By partners, I don't mean they were reselling Siebel applications.  I mean we partnered with them to market, sell, and implement our joint solutions. We were compensated on our products/services and they were compensated on their products/services.

So, as you might imagine, I am a huge fan of partnerships. We won the Forbes award for the most innovative partnering program in the technology industry at the time and every technology company knew how powerful it was. It wasn’t a secret.  I find it interesting – with all the success we had with the Siebel Alliance Program - that none of the incumbent technology companies have replicated its form or function.

I believe the current technology platform leaders have a tremendous opportunity to develop a similar program. Sure, they all have partner programs, but those programs don’t really put a lot of skin in the game. By that, I mean, they don’t obligate the leaders to do much or to invest in their partners beyond providing basic access to some technology and lightweight market awareness. 

For our program, we actively recruited and hired hundreds of MBAs from the top universities as well as industry professionals and chartered them to create joint business plans with our partners, advocate for our partners with our product and sales organizations, and held the Siebel Alliance organization accountable for helping our partners achieve their revenue and market share objectives. We built specific marketing programs – brand and demand gen – that partners could sponsor to generate leads for themselves. We put skin in the game.  

The program was so successful that Harvard Business School wrote a business case study about it. So, I'm pretty proud of it.

 Today, though, for the most part, the large technology platform companies offer what I call “paper partnerships”.  Those partnership don’t obligate either party to much of anything.  They're not “skin in the game” partnerships so they are anemic, at best. 

Most startup teams have little experience partnering with these large technology providers. And, even if they do, they have found that those companies offer little that their startup can benefit from. There's little provided by the large company that is likely to generate significant market awareness or revenue for the startup. For example, startups need to know who, from the partner’s organization, wakes up every morning worried about helping the startup to succeed; where are the demand gen programs they can co-invest in to generate awareness and interest in the startup’s products?  Which teams inside the large company are held accountable for achieving the market share and revenue objectives of the startups in their partner community? The answer? None. Those partner programs are essentially worthless – at least as far as the startup community is concerned. 

Salesforce built an App Store and prospective customers can certainly search for and find add-on applications and products for the Salesforce ecosystem there. However, that's a pretty lightweight endorsement for startups. Who is held accountable within the four walls of Salesforce to wake up every morning, ensuring that a particular partner has the leads it needs, generating a robust pipeline, and helping the startup to convert that pipeline into revenue?

I don’t mean to call out Salesforce. At least they developed an innovative approach and put a lot of energy behind it. And, they have done some advanced partnering with Vlocity. Vlocity was founded by some of my former Siebel colleagues.  What's Vlocity doing?  They're building vertical applications on top of the force.com platform. 

Salesforce saw a need to have much deeper vertical versions of their platform.  That's what we did at Siebel (create vertical solutions of Siebel) and David Schmaier led that initiative as the executive VP. David is the founder and CEO of Vlocity. David and his team are replicating what we did at Siebel for Salesforce and it's going very well. 

I'm an investor in Vlocity, and, to your point about partnering, it's an example of what can – and I think should - be done between technology platform providers and the startup ecosystem.  As this example shows, it's not just about partnering with systems integrators. 

If you want these partnerships to amount to anything there needs to be alignment and shared objectives. For example, if you want to garner the attention of the partner’s sales organization, there is nothing like making partner revenue a part of the sales rep’s quota.

The truth is that partner programs as conceived and implemented by the current technology platform leaders just don’t do much for startups – in terms of market share and revenue - and therefore it shouldn’t be surprising that those programs aren’t valued by startups.

Apple has done well in its ecosystem – with the App Store - but the consumer world doesn’t require face-to-face interactions. In the B2B world, people's work reputations are on the line when they make a buy decision. And, in almost all cases, there are multiple decision makers who must be convinced.  For B2B, startups need brand credibility from the platform provider. This happens when they implicitly endorse the startup by working closely with them. 

In the consumer world, a startup can “borrow” the brand of Apple because if their application is admitted into the Apple App Store, it tells consumers, "Look, we vetted this product. It adheres to our rules." 

Conversely, I don’t think that Salesforce’s App Store does a lot for startups. It’s essentially a digital catalog with some ratings/rankings. That’s not enough for most businesses to make a buy decision. If you speak with startups about the Salesforce App Store and ask them if it is a significant source of revenue for them, I think you will find that for most, it isn’t.

Startups lack credibility.  They lack access to prospective customers.  And, they lack sufficient marketing dollars.  This is where the enterprise vendors could really help startups.

I had hoped that the technology leaders would have adopted at least some of the best practices we had created with the Siebel Alliance Program. Tom Siebel and his new company, C3, are developing a similar program to what we had at Siebel Systems. So, I believe the principles are as valid today as they were back then.

When you look at the cloud apps market there are so many white spaces - major geographies, industry verticals etc - and they do not seem to be targeted by established vendors or even by startups. How are investors like you guiding them through these white spaces?

Cloud computing with its subscription business model - and delivery and usage model -has democratized business application software. Prior to cloud computing, it was prohibitively expensive for smaller companies to acquire and implement enterprise-class applications.

But, by dramatically dropping the cost of these solutions, I suspect it has constrained the application providers’ ability to support smaller geographies and industry verticals.  Going after smaller markets that require significant translation and support infrastructure at much lower price points isn’t practical. 

Even with traditional (re: higher priced) enterprise software, it was always challenging to create localized versions of products for a specific market.  Most US companies started out with the English speaking markets and then typically moved to countries such as Germany, Spain, and France with relatively large populations.  But, when they were asked to support a Dutch or Finnish version, it was seldom worth the upfront and ongoing cost.

For a large company to continue to grow at a significant rate, it needs to acquire or build new solutions that add significant revenue streams – quickly. In that context, let's talk about SAP and Salesforce.  One is a classic enterprise technology company with primarily a perpetual license business model.  The other is the "modern" cloud computing company with a subscription business model. 

The challenge with both of those organizations is that to grow meaningfully they have to build or acquire something of meaningful size.  Moving into a small geography requires the same resources or at least the same FTE costs that might be invested in something else and could generate a much larger impact.  So, it should be little surprise why we are seeing these large companies look to make large acquisitions and avoid niche industries and geographical markets. 

To your point, one might think, “Hey, if these market leaders are not seeing a lot of companies growing fast enough to make a measurable impact on their top line why aren't they helping smaller companies to grow so that they can eventually acquire them?”

Technology leaders may want to look at making investments in smaller technology companies where they see strategic value. These leaders can protect their interests by exchanging an equity investment and access to their channels with a Right of First Refusal (ROFR) that allows the leader to acquire the smaller company when it reaches a certain revenue threshold, at some predetermined price based upon a number of factors such as the acquirer’s stock multiple at the time. 

With the respect to investing in and expanding the number of verticals supported, there may be a dearth of deep domain expertise inside some of the larger technology companies to do that well. I don't know whether these companies have initiatives to try to hire subject matter experts from industry to help them drive their product management.  They may and I'm just not privy to it. 

I do know that Salesforce took a run at creating vertical solutions and it wasn't as effective as they had hoped, at least not at the time. This is one of the reasons that led to their investment in Vlocity.  I think this makes the case that the technology leaders, at least those in the B2B markets and not normally inclined to partnering, could really benefit by embracing partnerships. 

Instead, it looks like the majority of them sit back and wait to see which startups “make it”, without their help, and then acquire the few that do. This seems rather silly because by doing that they have to then compete in the open market – and pay a premium - to keep them out of the hands of competitors.

What do you find interesting in today's enterprise space?

Roughly every ten years, new technology is introduced that dramatically changes our work and personal lives.  In the 60s it was mainframe computing. In the 70s it was minicomputers. In the 80s it was PCs. In the 90s it was client/server computing and in the 2000s, it was largely cloud and mobile computing which spawned “digital transformation”, beginning in the consumer markets with companies such as Amazon, Apple, Facebook, NetFlix, Google, etc. Digital transformation has now moved full speed into the enterprise markets.

I believe digital transformation - digital disruption - is such a big transition it will require multiple decades.  I think it has a chance to undo a lot of the current market leaders in every industry.  To your point, maybe vertical providers will emerge and dominate the markets due to digital transformation issues.

The emerging opportunity in the enterprise is in systems of intelligence. This is where I think vertical solutions can dominate.  Systems of intelligence use the data generated and captured by systems of record and systems of engagement to enable companies to derive better business insights, faster and far more accurately than ever before.  I mean real-time insights and real-time responses, without humans involved, that can be triggered via key business events and moments of value. 

Here is an example in the retail space. Let’s say I'm walking through PetSmart and I'm a repeat PetSmart customer. I’m a member of the PetSmart loyalty program. If PetSmart has implemented a system of intelligence and placed beacons throughout the store, I have PetSmart’s loyalty application on my phone, and I provide my permission to send me offers, PetSmart can enable brands to generate contextually-relevant real-time offers to me as I walk through the store.  An offer could be from a brand I don’t normally buy for my dog. The system of intelligence has access to POS data from my prior store purchases. PetSmart makes $ by serving up the competitive offer and if/when I decide to redeem the offer in a coupon that could be set to expire if I walk out of the store without making the purchase. Powering this type of application requires a different type of computer and systems architecture. 

The biggest opportunity may come from vertical systems of intelligence built on top of the older systems of record and systems of engagement.  In my PetSmart example, it means that you've got to be able to interface with an existing point of sale system, not replace it. This is where I would advise B2B application startups to focus. Trying to replace the existing systems of record and engagement is tough to do. 

Trying to rip and replace technology is hard to do.  Building next-generation systems of intelligence that utilize the existing systems of record and engagement is far easier.  That's what a lot of the startups we work with are doing.